A Closer Look At London House Prices

The subject of housing is always a media favourite, so when the ONS index showed an 8.0% year-on-year increase in nominal house prices in the UK during March 2014, it was bound to hit the front pages. Prices in London have led the way, registering an annual 17.0% increase in the same month. At a record £459,226, the average London house price had surpassed its 2008 peak by 31.1% and stood 48.8% higher than the average in the South East – the second most expensive region in the UK. This compares with the average UK house price which stood at £252,019 in March, 14.0% higher than its pre-recession peak in January 2008.

Adjusting for inflation paints a different picture…

The conjuncture changes noticeably when house prices are adjusted for inflation. Deflated using the retail prices index (RPI), real London house prices were a moderate 8.0% higher than their pre-recession peak, whereas nationwide house prices were 6.6% down. Furthermore, excluding London, UK house prices came in 12.7% lower.

Talk of a London pressure cooker looks even less plausible if you take readings from other house price indices. Despite hefty nominal gains, Halifax and Nationwide (based on these organisations’ mortgage lending) and the Land Registry (which excludes new-build properties) all show London house prices are yet to recover to pre-recession levels in real terms.

…as does the inclusion of cash purchases

A note of caution remains, however. The growing prevalence of cash purchases is not taken into account in the ONS, Land Registry, Halifax or Nationwide house price indices. Separate research from Savills and Hamptons found that an estimated one in three UK properties was purchased on a cash-only basis in 2013. Furthermore, the LSL Acad house price index, which is the sole measure to include cash purchases, reveals a starker version of the ONS results: real house prices in England and Wales remain 10.8% below pre-recession levels; London house prices are now 12.2% higher.

London property demand is well-supported…

Even though these inflation-adjusted measures do take some of the wind out of London’s house price sails, it raises the question of why the capital is outperforming the rest of the country in terms of a recovery in housing market demand.

It appears that the answer is multi-faceted. Demand is supported by foreign and UK-domiciled investors pouring money into the perceived safe-haven status of prime London property, and the region’s growing population adds further strain on supply. The Greater London population rose by 12.6% to 8.3 million in the decade to 2012, outpacing an 8.8% increase in the dwellings stock over the same period.